Risk Management in International Business

Course: International BusinessIndian Institute of Plantation Managementpresented by: Group- 04(PGDM2011-13)

BIDHU BHUSHAN BINITYOGESH

AMIT PANDITANUDEEP

CYRIAC DOMINIQ

“If you are never scared embarrassed or hurt, it means you never take any chances.”

-Julia Sorel “No risk ;No gain.” - anonymous

Some Major Issues Local insurance regulations and practices Prohibitions against non-admitted coverage Centralization vs. decentralization of risk

management (global vs. local coverage) Local support for risk management Valuation of property for coverage purposes Foreign currency fluctuations Local legal environment (due process) Impact of language on coverage issues Cultural differences: religious beliefs, gender

roles, work attitudes, etc. Political structure

Types of coverage Local/Admitted Non-admitted

Admitted Non-admitted

Local Adhered to local

administrative regulations

Often needed for local financing

Difficult to manage for centralized MNE

Claim payment not taxable

International Not complied to local

regulations Broad coverage Easier with

centralized MNE Claim payment

taxable

Global Insurance Program A global insurance program is purchased

centrally, with a master contract covering all the MNE’s risks. Negotiated in the MNE’s home country Combines benefits of non-admitted and

admitted coverage Combines coverage of both the MNE’s domestic

and foreign exposures

Global Insurance program Advantage :- One obvious advantage is the potential economy

from centralized buying . Disadvantage :- One potential difficulty is finding an insurer with

a global network of engineers, claim adjusters, and other service personnel.

The Global Master Policy A global master policy is issued on a non-

admitted basis. The global underwriter instructs local affiliates

what policies to issue (subject to local regulations).

The master policy provides excess and DIC over local/admitted policies.

Increased limits may be needed if there is a possibility of liability in a country other than where damage occurred.

Global Insurers Leading U.S. insurers with a significant

presence in the international market include AIG, CIGNA, Ace, and Chubb.

Non-U.S. insurers with a significant presence include Zurich, Winterthur, Swiss Re, Gerling, Allianz, XL, et al.

Buyers usually can access global programs through New York, London, or other major financial centers.

Global Brokers Several leaders have emerged from a

combination of U.S., U.K., and other international brokers: Marsh, Inc. (MMC) Aon Willis IRMG

These international brokerage/consulting firms are present in most countries, maintaining contacts with local admitted insurers, and capable of creating global programs.

Admitted or Non-admitted

?..?...?Strategic option for MNEs

Admitted or Nonadmitted?It depends on the structure of the MNE.Centralized: mostly organization goes with

international(nonadmitted) option.Decentralised: goes with admitted insurance policies, but

with guidelines and strict performance standards.

Decentralized MNE

In cases where a foreign affiliate was acquired by an MNE, the affiliate may have long-term relationships with local insurers.

Business advantages may be gained from local purchase of insurance.

Sometimes, risk managers purchase the minimum permissible amount of insurance locally, and cover the bulk of exposures under a non-admitted difference-in-conditions policy.

Risks for MNEs & approaches to deal with

Export-import risk

Foreign exchange risk

Political risk

Risk Management in Export-import Business

Risk Assessment and the Firm’s Foreign Market Entry Strategy: Managing Distance and Communications Special Transactions Risks in Contracts for the Sale of Goods:

Payment or Credit Risk, Property or Marine Risk, Delivery Risk, Pilferage and Theft Risk

Risks of Foreign Laws and Courts Commercial Risks : Lack of Knowledge, Inability to adapt to the

environment, Different kinds of situations to be dealt with, Greater transit time involved

Foreign Exchange Risks One of the most significant risks facing an MNE

involves variations in foreign exchange rates.

An exchange rate represents the number of units of one currency that can be exchanged for another.

When a foreign currency declines in value relative to the dollar, a U.S. company suffers a loss from any assets payable in that currency.

Hedging, Swaps, Arbitrage od currency market

Approaches to Dealing with Foreign Exchange Risks Minimize holding of foreign currencies Retain currency risks internally. Hedge in the options/futures market for

foreign currencies.

Political Risk MNEs are frequently exposed to political risks. These are caused by any local government’s

action (or failure to act) that diminishes the value of a firm operating within its borders.

nationalization of assets of a local subsidiary/affiliate without sufficient compensation.

Damage to property or personnel by anti-government activity

War, insurrection, terrorism Study thy doing business indicators/understand

the geo-political issues

Managing Political Risks Shared ownership reduces both the likelihood

and the potential severity of loss. Enter into a joint venture with local investors:

to establish local support for the firm, and to provide better information on the country’s

political/economic conditions. Limit the amount of capital invested in the

local subsidiary/affiliate.

Political Risk Insurance

Sources of political risk insurance are extremely limited: 1. OPIC and MIGA

2. AIG, Chubb, ACE, Zurich

3. Lloyds of London

Conclusion Doing business internationally is strategically

good option to sustain and increase the revenue profoundly. But the greater risks are involved. Risk management must be the integral part of decision making process keeping international business environment in mind.

Selection of type of coverage depends on many factors like structure of organization, political condition..etc. So all factors should be kept in mind.

THANK YOU !